The China Challenge

For global companies, ignoring China is not an option. But they must adapt their strategies to the country’s changing markets, increased competition, and shifting government priorities.

In 2006, the IBM Corporation uprooted the main offices for its global procurement services. It transferred them from Somers, N.Y., 20 miles north of corporate headquarters at Armonk, to Shenzhen in south China’s Pearl River Delta, just across from Hong Kong. It was a notable moment: the first time one of IBM’s most critical departments had moved its center from the United States. And it marked a significant milestone along the road toward making IBM a “globally integrated enterprise” running “truly global systems of production,” as its CEO, Sam Palmisano, had written in Foreign Affairs the same year.

IBM’s executives knew, from many years of firsthand experience, that this region in southern China had become home to one of the biggest pools of procurement talent in the world. The company had arrived in 1993, manufacturing personal computers — a business it eventually sold in 2005, to Lenovo, a Chinese company. Over the years IBM had produced servers, retail store systems, storage devices, and printers in Shenzhen: first for overseas markets, and later, increasingly for the Chinese market. It had seen massive supply networks develop in the Pearl River Delta. Some suppliers made parts for toys, sports shoes, and other low-end products; others made components for sophisticated computing and telecommunications equipment. Still others provided logistics and supporting technology. IBM had also seen the Chinese government invest in business-friendly infrastructure: economic zones, industrial parks, highways and container ports, universities and training colleges. By locating its global procurement headquarters in Shenzhen, IBM was not only strengthening its own supply base, but better positioning one of its core businesses: helping clients strengthen their supply chains.

The company has also invested in R&D in China. Its China Research Laboratory, one of eight flagship IBM labs around the world, is located in Zhongguancun Software Park, next to Beijing’s main university district. Most of its more than 150 researchers hold doctorates or master’s degrees from Beijing, Tsinghua, or other leading Chinese universities. The lab specializes in speech and language technologies, cross-border e-business solutions, and pervasive computing, which is the embedding of microprocessors in everyday objects. IBM opened another lab in Shanghai in 2008. In consulting, despite the global economic slowdown, IBM has been on a growth trajectory, doubling its business in 2009 because of Chinese demand. It plans to open four new offices in China, taking its total presence from six to 10. Moreover, IBM runs all its global growth businesses from Shanghai. This includes its businesses in Asia, Latin America, Russia, eastern Europe, the Middle East, and Africa.

In short, IBM’s presence in China is very different from what might have been envisioned a few years ago. It is defined not by an expanding consumer population or by low-wage labor, but by the integration of Chinese activity with its worldwide enterprise. Like a growing number of other companies — Coca-Cola, Honeywell, KFC, and Goodyear among the most prominent — IBM has a “one world”–oriented strategy for its operations in China. In addition to sourcing products in China and seeking out Chinese markets, it is investing dramatically in operations there and integrating them with the rest of IBM’s global enterprise.

The benefits of a one-world strategy in China have become obvious, and a growing number of multinational companies — or “foreign” companies, as the Chinese think of them — are ready to increase their presence. They may already market to some Chinese consumers, or draw from the country’s labor pool, or outsource manufacturing there, but now they want more. China’s rapid recovery from the global recession, bolstered by its reorganized banking sector and its emerging middle class, has attracted many companies to the Chinese economy. As Financial Times columnist Martin Wolf wrote on September 13, 2009, the West’s “reputation for financial and economic competence is in tatters, while that of China has soared.” Moreover, profitability is rising for global companies in China. A 2009 study by the American Chamber of Commerce in Beijing noted that in 1999, only 13 percent of companies reported margins in China that were higher than their worldwide averages; in mid-2008 (before the onset of the global financial crisis), this figure reached 50 percent. Moreover, a large number of multinational executives feel that they have gained enough experience in China to expect a relatively coherent, expanding future for their Chinese operations.

Resources

American Chamber of Commerce in Shanghai and Booz & Company, “China Manufacturing Competitiveness 2008–2009,” 2009: Research on the evolving capabilities and interests of manufacturers in China.

Andrew Cainey, Suvojoy Sengupta, and Steven Veldhoen, “Capturing the Asian Opportunity,” s+b, Winter 2009: Why economic recovery in China, India, and elsewhere in the region could be the strongest source of sustained global growth for years to come.

Patrick Chovanec, “The Nine Nations of China,” The Atlantic, November 2009: The further differentiation of China, its culture, and its prospects for development and change.

Edward Tse, The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010): An overall, in-depth guide to the vision, versatility, and vigilance demonstrated by successful companies in China today.

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